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VALLEY TALK
Behind the VC Music
FORTUNE
Wednesday, November 22, 2000
By Mark Gimein
Stephen Lisson is not a conventionally likable guy. On more
than one occasion, he's implied that I'm the single stupidest
reporter he's ever talked to. He has kept me on the phone for
hours at a time listening to the most arcane statistics, until I've
slammed down the phone in frustration. He calls people who
disagree with him "lickspittles." He dismisses many of the
visitors to his Website as "parasites."
And yet over the past few months I have repeatedly gone back to
Lisson and his new Website, InsiderVC.com, because Lisson has
the best data out there about venture capital, and often the most
interesting things to say about it.
Venture capitalists are the rock stars du jour of the financial
world, a species of money managers who are believed capable of
superhuman wisdom. Business magazines tend to assume that
the richer you are, the smarter you must be, and the Internet
boom has lavished untold riches on the venture capitalists who
invested early.
"Untold" is a key word here, because hardly anyone knows
exactly how great these riches are. In this way, venture-capital
funds are very different from, say, mutual funds. Venture
capitalists talk vaguely about "triple-digit returns," but even
successful funds tend to keep their returns a closely guarded
secret. And even when they do reveal numbers, they can be hard
to understand.
This is where Austin, Texas, entrepreneur and venture-capital
gadfly Stephen Lisson comes in. Through years of research and,
apparently, a lot of cooperation from a network of sources
willing to send him copies of the reports that venture-capital
firms send out to their investors, Lisson has gathered an
immense database of information about venture-capital firms'
investments and profits.
Lisson doesn't make all his data public--much of his information
is limited to subscribers, and he can be picky even about whom
he allows to subscribe. But what he's already revealed in the
public sections (for example, see: Database Example) of
InsiderVC.com is fascinating. Some of his data shows exactly
what you might expect. Benchmark Capital Partners' 1995 fund-the
fund that famously invested in eBay--has already returned to
its investors 38 times the money they put in. Investors who put
money into the fund that Kleiner Perkins Caufield & Byers,
Silicon Valley's best-known venture-capital firm, raised in 1996,
have already made a similarly spectacular return of over 1,000%.
But you'll also find that the 1997 fund raised by Hummer
Winblad, another venture-capital firm that has traditionally
received a lot of attention from the press, has so far returned
only 42% of its investors' money. That might be a decent
showing in any other era, but in the middle of the biggest
technology boom or bubble in history, it's not great, and not
nearly as good as some of Hummer Winblad's peers. (Typically,
venture funds distribute cash or stocks as the companies in their
portfolio are sold or go public. In theory, that means they can
continue paying out money to investors for a very long time, but
in practice, almost all of their profits are made in the first six
years of the fund.)
Even more interesting are the data that Lisson has gathered on
how venture capitalists value their investments. Venture
capitalists measure their own performance by an "internal rate of
return"--an annualized rate of increase in the value of their
investments. Often that'll be a number in the high double digits,
sometimes in the triple digits. Sounds pretty good when you
compare it with the typical mutual fund. But if you look at the
InsiderVC.com database, you'll find that funds claiming
immense annual returns sometimes pay out a lot less money to
investors than you'd imagine.
As of March 2000, Benchmark claimed an annualized return of
an amazing 279% for Benchmark III, the fund that the firm
raised in 1998. But wait a second! Lisson's data also show that
Benchmark III hadn't actually distributed any cash or stock to its
investors. That 279% return was based on a guesstimate of the
value of the companies Benchmark has invested in--companies
that, since they hadn't gone public, are notoriously hard to value.
One of those companies, Living.com, has already gone bankrupt,
reducing the value of Benchmark's investment from an estimated
$74 million to zero. And it's hard to believe that, with the Net
bubble bursting, Benchmark's investment in eBags.com is really
worth the $20 million-plus that Benchmark valued it at in
March.
For individual investors who don't have a prayer of putting their
money into funds that deal only with tech insiders, large
institutions, and foundations, analyzing exactly how much the
top funds make can certainly seem like an academic exercise. It
can all sound arcane, confusing, and dull, and if you are not an
investor in venture-capital funds, I don't recommend it as a
hobby or a business. But it's important that somebody do it.
First, because venture investment is the engine driving much of
Silicon Valley's technological innovation. And, second, because
it's important for somebody like Lisson to remind investors and
the business press that venture capitalists are not the gods of
finance they are often made out to be, but instead, very well-
trained money managers. Sometimes very smart money
managers, sometimes very lucky money managers, but
nonetheless, financiers who'll often make a lot of money and
sometimes, like the rest of us, flub it.
HOME | COMPANY PROFILES | INVESTING | CAREERS | SMALL BUSINESS | TECHN
© Copyright 2003 Time Inc. All rights reserved. Reproduction in whole or in part without permission
Privacy Policy Terms of Use Disclaimer Contact Fortune
Behind the VC Music
FORTUNE
Wednesday, November 22, 2000
By Mark Gimein
Stephen Lisson is not a conventionally likable guy. On more
than one occasion, he's implied that I'm the single stupidest
reporter he's ever talked to. He has kept me on the phone for
hours at a time listening to the most arcane statistics, until I've
slammed down the phone in frustration. He calls people who
disagree with him "lickspittles." He dismisses many of the
visitors to his Website as "parasites."
And yet over the past few months I have repeatedly gone back to
Lisson and his new Website, InsiderVC.com, because Lisson has
the best data out there about venture capital, and often the most
interesting things to say about it.
Venture capitalists are the rock stars du jour of the financial
world, a species of money managers who are believed capable of
superhuman wisdom. Business magazines tend to assume that
the richer you are, the smarter you must be, and the Internet
boom has lavished untold riches on the venture capitalists who
invested early.
"Untold" is a key word here, because hardly anyone knows
exactly how great these riches are. In this way, venture-capital
funds are very different from, say, mutual funds. Venture
capitalists talk vaguely about "triple-digit returns," but even
successful funds tend to keep their returns a closely guarded
secret. And even when they do reveal numbers, they can be hard
to understand.
This is where Austin, Texas, entrepreneur and venture-capital
gadfly Stephen Lisson comes in. Through years of research and,
apparently, a lot of cooperation from a network of sources
willing to send him copies of the reports that venture-capital
firms send out to their investors, Lisson has gathered an
immense database of information about venture-capital firms'
investments and profits.
Lisson doesn't make all his data public--much of his information
is limited to subscribers, and he can be picky even about whom
he allows to subscribe. But what he's already revealed in the
public sections (for example, see: Database Example) of
InsiderVC.com is fascinating. Some of his data shows exactly
what you might expect. Benchmark Capital Partners' 1995 fund-the
fund that famously invested in eBay--has already returned to
its investors 38 times the money they put in. Investors who put
money into the fund that Kleiner Perkins Caufield & Byers,
Silicon Valley's best-known venture-capital firm, raised in 1996,
have already made a similarly spectacular return of over 1,000%.
But you'll also find that the 1997 fund raised by Hummer
Winblad, another venture-capital firm that has traditionally
received a lot of attention from the press, has so far returned
only 42% of its investors' money. That might be a decent
showing in any other era, but in the middle of the biggest
technology boom or bubble in history, it's not great, and not
nearly as good as some of Hummer Winblad's peers. (Typically,
venture funds distribute cash or stocks as the companies in their
portfolio are sold or go public. In theory, that means they can
continue paying out money to investors for a very long time, but
in practice, almost all of their profits are made in the first six
years of the fund.)
Even more interesting are the data that Lisson has gathered on
how venture capitalists value their investments. Venture
capitalists measure their own performance by an "internal rate of
return"--an annualized rate of increase in the value of their
investments. Often that'll be a number in the high double digits,
sometimes in the triple digits. Sounds pretty good when you
compare it with the typical mutual fund. But if you look at the
InsiderVC.com database, you'll find that funds claiming
immense annual returns sometimes pay out a lot less money to
investors than you'd imagine.
As of March 2000, Benchmark claimed an annualized return of
an amazing 279% for Benchmark III, the fund that the firm
raised in 1998. But wait a second! Lisson's data also show that
Benchmark III hadn't actually distributed any cash or stock to its
investors. That 279% return was based on a guesstimate of the
value of the companies Benchmark has invested in--companies
that, since they hadn't gone public, are notoriously hard to value.
One of those companies, Living.com, has already gone bankrupt,
reducing the value of Benchmark's investment from an estimated
$74 million to zero. And it's hard to believe that, with the Net
bubble bursting, Benchmark's investment in eBags.com is really
worth the $20 million-plus that Benchmark valued it at in
March.
For individual investors who don't have a prayer of putting their
money into funds that deal only with tech insiders, large
institutions, and foundations, analyzing exactly how much the
top funds make can certainly seem like an academic exercise. It
can all sound arcane, confusing, and dull, and if you are not an
investor in venture-capital funds, I don't recommend it as a
hobby or a business. But it's important that somebody do it.
First, because venture investment is the engine driving much of
Silicon Valley's technological innovation. And, second, because
it's important for somebody like Lisson to remind investors and
the business press that venture capitalists are not the gods of
finance they are often made out to be, but instead, very well-
trained money managers. Sometimes very smart money
managers, sometimes very lucky money managers, but
nonetheless, financiers who'll often make a lot of money and
sometimes, like the rest of us, flub it.
HOME | COMPANY PROFILES | INVESTING | CAREERS | SMALL BUSINESS | TECHN
© Copyright 2003 Time Inc. All rights reserved. Reproduction in whole or in part without permission
Privacy Policy Terms of Use Disclaimer Contact Fortune
NVCA Advocates More Confidentiality on Returns
NVCA Advocates More Confidentiality on Returns
The Private Equity Analyst WEEKLY Page 6 of 7 NOVEMBER 12, 2001MARKET INTELLIGENCE
NVCA Advocates More Confidentiality on Returns By Sree Vidya Bhaktavatsalam
Could it be a coincidence that GPs are getting touchier on the
issue of confidentiality of fund performance data at a time when
private equity returns are plummeting?
The National Venture Capital Association recently distributed
a list of suggestions for GPs to reduce unwanted
disclosure of information included in reports to their LPs,
particularly public pension funds, presumably to spare GPs the
shock of seeing their fund returns posted on a Web site or in a
trade press article.
Many state, municipal and local pension funds have fair
disclosure regulations, which, in the interest of transparency,
may require that the information be made available to the
public. NVCA's suggestions include entering into confidentiality
agreements with LPs and tailoring the data distributed to
minimize the "harmful effects of subsequent public disclosure."
Advocates for keeping performance data confidential
argue that the private equity industry relies on imperfect
information about private companies, which can be too
sensitive to reveal to the public. Also, they say that in the
absence of any standardized method of reporting private equity
returns, performance data presented in the form of IRRs can be
inaccurate and misleading.
President Mark Hessen of the NVCA says his concern is
that individuals (reporters, for example, or retirees whose public
pension program is used to invest in private equity funds) may
not be well-versed in the intricacies of performance data and
thus will get a distorted view of overall fund returns by looking
at quarterly reported returns.
'A quarterly perspective is not representative of the entire
fund,' he says. "We need to educate the public before we can
throw this information out there."
Still, some like Michael Smith, director of research at
Atlanta-based consulting firm Hewitt Investment Group, believe
that transparency is the only way for prospective
Sources of private equity fund performance data
Venture Economics, Newark, N.J.: A division of
Thomson Financial. Provides industry wide private
equity performance benchmarks. Reach the firm at 973-
622-3100.
Cambridge Associates, Boston: Provides private
equity performance benchmarks and consulting services.
Reach the firm at 617-457-7500.
InsiderVC.com. Austin, Texas: Provides performance
data on individual venture capital firms. Its Web
site is at www.insidervc.com.
investors to separate "the wheat from the chaff.
"This is a market that two years ago did not need new
quality institutional investors," he says. "Clearly that is different
now-if (VCs) want to broaden their appeal, the way to do it is by
making it more transparent."
NVCA's suggestions come at a time when GPs are still
smarting from California Public Employees' Retirement
System's decision earlier this year to post fund performance
data on its website. Calpers posted the IRRs of the 163
partnerships it had invested in since 1990, and had downgraded
some firms as "not performing up to expectations." (See Private
Equity Analyst Weekly, June 4, page 5.) A few months later,
Calpers yanked the returns data from its Web site, after receiving
complaints from its GPs.
So, how can prospective investors gain access to the
performance data of venture capital and private equity firms?
Some public pension funds do make their quarterly performance
reports available to the public as a matter of course. Others,
like Florida State Board of Administration, make information
available, if the public requests it. And then there are quarterly
benchmark numbers for the whole industry released by Venture
Economics and Cambridge Associates. (See table below.)
One source of fund performance data is the Web site
InsiderVC.com, whose founder, Stephen Lisson, has received
both brickbats and bouquets from venture capitalists for his
analysis of performance data and his provocative commentary.
His Web site provides performance data of hundreds of venture
capital and private equity funds including those managed by
New Enterprise Associates and Matrix Partners.
In an interview, Mr. Lisson declined to reveal his sources
of information. "The reason people share information with us is
that we are very discreet, and we are very careful about who
sees our information." Indeed, Mr. Lisson carefully screens
applicants before allowing them to subscribe to the performance
data contained in his Web site.
Mr. Lisson stresses that his data is not intended for the general
public. "My data is for insiders to improve their own game. VCs get to
benchmark themselves against their peers-it's a confidence level
thing," Mr. Lisson says. Mr. Lisson acknowledges that the VC
community could benefit from a healthy dose of transparency and
humility. "Sunlight is the best disinfectant," he says. But he questions
the value of making public IRRs and interim valuations, which by
nature are based on subjective evaluations. "There should be less
focus on returns and interim valuations, and more focus on building
world class companies."
Copyright 2001 Asset Alternatives, Wellesley, Mass.
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